presents presents Going Private: Legal and Strategic Considerations Structuring Transactions to Withstand Court and SEC Scrutiny A Live 90-Minute Teleconference/Webinar with Interactive Q&A Today's panel features: James D. Honaker, Partner, Morris Nichols Arsht & Tunnell , Wilmington, Del. Darrel A. Rice, Partner, Haynes & Boone , Dallas Nancy L. Sanborn, Partner, Davis Polk & Wardwell , New York Tuesday, August 17, 2010 The conference begins at: The conference begins at: 1 pm Eastern 12 pm Central 11 am Mountain 10 am Pacific 10 am Pacific You can access the audio portion of the conference on the telephone or by using your computer's speakers. Please refer to the dial in/ log in instructions emailed to registrations.
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Going Private: Legal and Strategic Considerations Structuring Transactions to Withstand Court and SEC Scrutiny August 17, 2010 James D. Honaker, Partner Darrel A. Rice, Partner Nancy L. Sanborn, Partner Morris, Nichols, Arsht Haynes and Boone, LLP Davis Polk & Wardwell LLP & Tunnell LLP
Introduction - What is a Going Private Transaction? What is a Going Private Transaction? A transaction or series of transactions: with a controlling stockholder, management, or other persons affiliated with a public company that reduces the number of stockholders, allowing the company to terminate its public company status and related reporting obligations under the ’34 Act Most common types of going private transactions: Acquisition by controlling stockholder (sometimes referred to as a squeeze-out merger) Acquisition by a significant but non-controlling stockholder Leveraged buyouts by a private equity fund or other third-party acquirer working with management 5
Introduction - Current Trends Going private transactions are becoming more common after a slow year in 2009 Factors: Increased availability of debt financing (for both financial and strategic buyers) Cash positions on many corporate balance sheets Private equity commitments must be invested before commitment periods expire Growing disclosure obligations and enhanced scrutiny and regulation of public companies Significant concerns remain that transactions won’t close Continued focus on reverse break-up fees to compensate target company if acquiror fails to close Amount and circumstances when reverse break-up fee is payable Focus on rights to specific performance to force sources of committed debt and equity financing to fund their commitments 6
Introduction – Focus of this Webcast Legal and strategic considerations for going private transactions based on: Reasons for going private Structure of going private transactions Risk of litigation Delaware law developments Disclosure obligations under state law Disclosure obligations under SEC Rule 13e-3 Section 13(d) disclosure obligations 7
Reasons for Going Private “Going private” allows the company to avoid the disadvantages of being a public company, while permitting the controlling stockholder to retain, or new owners to hil itti th t lli t kh ld t t i t acquire, control Reasons for going private may include: Belief that the company’s stock is undervalued Allow the company to focus on long-term objectives rather than short-term profits Permit a more leveraged capital structure than what would be tolerable for a public company Save costs and burden of compliance with the Exchange Act and the Sarbanes-Oxley Act Reduce distraction of public stockholders and analysts Lessen risk of stockholder litigation 8
Structure of Going Private Transactions Most common structures: One-step merger Tender offer followed by a back-end merger (also known as a two-step merger) May be advantages to pursue a tender offer/two-step merger: May be advantages to pursue a tender offer/two step merger: Timing advantage - less time for SEC review (and competing bidders) May benefit from lesser standard of review, but Delaware law in flux 9
Risk of Litigation Most going private transactions are challenged in court Typical claims: Breach of fiduciary duties Failure to comply with disclosure obligations Potential for conflicts of interest may lead court to apply “entire fairness” standard of review Controlling stockholder conflicts Management conflicts Use of proper procedures is critical If entire fairness review, proper procedures may shift burden to plaintiff Proper procedures may allow for business judgment review rather than entire fairness 10
Recent Developments in Delaware Law on Squeeze Out Transactions Squeeze-Out Transactions Delaware case law before recent decision in CNX : According to Delaware Supreme Court (Kahn v. Lynch ) : one-step merger with controlling stockholder reviewed for entire fairness, but burden shifted to plaintiffs to prove “not fair” if transaction approved by either: Special committee of independent disinterested directors or Special committee of independent, disinterested directors or Majority of the minority stockholders According to Chancery Courts (e.g., Pure Resources ): two-step merger with controlling stockholder subject to more deferential business judgment review if transaction “non- stockholder subject to more deferential business judgment review if transaction non- coercive”: Same consideration in both steps; Non-waivable majority of the minority tender condition; Non waivable majority of the minority tender condition; Promise to consummate short-form merger if controller obtains 90% stock ownership in tender offer; and Special committee of independent, disinterested directors provided sufficient time Spec a co ee o depe de , d s e es ed d ec o s p o ded su c e e and information to make a recommendation to minority. 11
Recent Developments in Delaware Law on Squeeze Out Transactions ( Squeeze-Out Transactions (cont.) t ) Chancery Court decision in CNX shifted this landscape: Facts in CNX : Facts in CNX : 80% stockholder launched a two-step tender offer to acquire the minority interest of CNX Gas. Controlling stockholder followed Pure Resources model: No negotiations with special committee (tender offer price was result of bargaining with No negotiations with special committee (tender offer price was result of bargaining with significant minority stockholder, which also owned stock in controller) Special committee formed after launch of tender offer – did not express opinion on whether stockholders should tender; noted concerns about the process resulting in the offer price CNX Holding: Satisfying Pure Resources test is not sufficient to attain business judgment review Business judgment review is available only if transaction is both : Approved by special committee vested with full power of board to respond to offer, and Approved by a majority of the minority stockholders 12
Recent Developments in Delaware Law on Squeeze Out Transactions ( Squeeze-Out Transactions (cont.) t ) Implications of CNX for Two-Step Tender Offers: Business judgment review appropriate only when transaction approximates true arms- length process Must balance following CNX structure with disadvantages of powerful special committee committee CNX raises the bar for potential damages claims if the controlling stockholder commences a two-step tender offer without complying with CNX requirements Transaction would be reviewed for entire fairness Transaction would be reviewed for entire fairness Settlement value for claims challenging a non- CNX -compliant transaction has increased 13
Recent Developments in Delaware Law on Squeeze-Out Transactions (cont.) Squeeze Out Transactions (cont ) Other Implications for Two-Step Tender Offers: Special Committee Authority: To obtain business judgment review, CNX suggests special committee should have full power of board, including power to: Explore alternative transactions (or decide not to) Adopt poison pill Negotiate terms of the transaction Calculating Majority-of-the-Minority Stockholder Approval. True majority of unaffiliated stockholders is required. t kh ld i i d CNX suggests a “hedged stockholder” (a minority stockholder who owned a similar economic interest in both the controlling stockholder and the target company) should have been excluded from calculation have been excluded from calculation Directors, officers and employees should likely be excluded “Denominator” should include all (and only) minority shares 14
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